Extraordinary Items
“Extraordinary items” is a term that was used in financial accounting under U.S. Generally Accepted Accounting Principles (GAAP) to refer to gains or losses stemming from events or transactions that were both unusual in nature and infrequent in occurrence.
These were events outside of the company’s typical business operations. The rationale was to separate these items on the income statement to provide a clearer view of the earnings from regular operations. Extraordinary items were reported separately, below income from continuing operations, net of tax.
Examples of what might have been considered extraordinary items include:
- Gains or losses from a natural disaster affecting a company’s assets, if the company operates in an area where such disasters are rare.
- Gains or losses from expropriation of assets by foreign governments.
- Gains or losses from early extinguishment of debt, if it was considered infrequent.
However, it’s important to note that in 2015, the Financial Accounting Standards Board (FASB), which sets the rules for U.S. GAAP, eliminated the concept of “extraordinary items” from the accounting standards. The FASB found that the concept was causing confusion and inconsistencies, and it wasn’t used in other major accounting frameworks, like the International Financial Reporting Standards (IFRS).
Since 2015, under U.S. GAAP, all gains and losses, even those that are unusual or infrequent, are reported as part of income from continuing operations.
Example of Extraordinary Items
Here’s an example illustrating how extraordinary items used to be reported under U.S. GAAP prior to 2015:
Let’s imagine that “MidWest Manufacturing Inc.” is a manufacturing company that has been operating in a region for decades where earthquakes are extremely rare. In 2014, a major earthquake hit the region, damaging the company’s main production facility. The damage resulted in an unexpected loss of $5 million, after insurance reimbursement.
Under the then-existing accounting rules, this loss would be considered an “extraordinary item” because it is both unusual (earthquakes are not common in that region) and infrequent (it’s not an event that the company expects to recur).
On the income statement, the company would report this as an extraordinary item, separately from its regular business expenses and net of tax. This separation was meant to help anyone reading the financial statements understand that this was a one-time event and not part of the company’s regular business operations.
However, as per the current accounting rules (post-2015), the company would include this loss as part of its income from continuing operations, without any special designation, because the concept of “extraordinary items” has been eliminated from U.S. GAAP.
